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12/10/2006

Should We Worry about the Rising Inequality in Income and Wealth?--Posner

Economic inequality is growing in the United States and other developed countries, and also in rapidly developing countries, notably China and India. Becker and I blogged about economic inequality on April 23, almost eight months ago, but indications that inequality is surging at the very top of the income distribution merits a further look, as does the recent study of world income inequality that is the focus of Becker's comment. Recent reports in the media document phenomenal returns to hedge-fund operators, private-equity investors, and other finance specialists, astronomical CEO salaries, enormous returns to software entrepreneurs, a stampede of lawyers and doctors to Wall Street, $200,000 law-firm signing bonuses for 27-year-olds who have clerked for the Supreme Court, enormous philanthropic gifts ($100 million gifts to colleges and universities by alumni are no longer unusual), and soaring demand for products bought only by superwealthy people, such as full-sized passsenger airliners converted at great expense to private airplanes, $40 million homes, paintings costing tens of millions of dollars, and automobiles costing several hundred thousand dollars. There are now almost 800 billionaires in the United States and countless millionaires, and one out of every 500 U.S. households have an annual income of at least $1 million.
Now this is to look only at the top of the income distribution. It is not to consider the income distribution as a whole, let alone poverty. In the more conventional focus on earnings by quintiles, one sees little change in recent years. But since 1980 the percentage of total personal income going to the top 1 percent of earners has risen from 8 percent to 16 percent. It is the top of the distribution on which I‚Äôll be focusing.
What are the causes, and what are the effects, of this trend in the income (and of course wealth) of the highest-earning segment of the distribution? Part of it is reduced marginal tax rates, because high marginal tax rates discourage risk-taking. Consider two individuals: one is a salaried worker with an annual income of $100,000 and good job security, and the other is an entrepreneur with a 10 percent chance of earning $1 million in a given year and a 90 percent chance of earning nothing that year. Their average annual incomes are the same, but a highly progressive tax will make the entrepreneur's expected after-tax income much lower than the salaried worker's. Many of the people at the top of the income distribution are risk takers who turned out to be lucky; the unlucky risk takers fell into a lower part of the distribution. It is rich people as a class who are growing relatively richer, not necessarily individual rich persons.
Marginal income tax rates on the wealthy have not declined much in recent years, however; but the income tax rate cuts since 2001 have favored the wealthy. Another and more important factor in the recent wealth surge is a growing return to high IQs; outstanding success in highly complex fields such as finance and software is highly correlated with high levels of intelligence. And increased size of markets as a consequence of increased international trade provides greater returns to successful innovations.
I am more interested in the effects of the increasing incomes of the rich--though one might ask: are there any effects, other than those that are perfectly benign? Even though the federal income tax is increasingly a proportional rather than a progressive tax (though it is still somewhat progressive--the average tax rate for the top 1 percent of earners--24 percent--is roughly twice that for all federal taxpayers), the more skewed the distribution of income, the higher the proportion of taxes that is paid by the rich. And in fact the top 1 percent of earners pay more than one-third of all federal income taxes today, which is a boon to the rest of the population. Very wealthy people also provide patronage for the arts, funds for high-risk ventures (actually, art is one of those ventures), and money for philanthropic enterprises. And there is very little envy of the rich on the part of other Americans, in part perhaps because of the much-derided but very real "trickle down" effect. This is due partly to philanthropy but more to the enormous consumer surplus generated by products such as Microsoft Windows, the brainchild of persons who are now billionaires. It is also due in part to the fact that, given diminishing marginal utility of income, income increases at lower levels in the income hierarchy increase personal welfare more than increases at higher levels do. Moreover, real wealth is a function of improvements in the quality and variety of products and services, and these improvements benefit all classes of the population.
All this is not to say that the existence of a stratum of exceedingly wealthy people is altogether to the good. There are three potentially bad consequences for our society:
1. The existence of enormous financial returns to IQ deflects high-IQ people from entering careers in which the social returns may greatly exceed the private returns: government service, basic science, and teaching. The quality of both the civil service and the public schools appears to be falling.
2. Massive philanthropy directed abroad can interfere with a coherent foreign policy. Major philanthropies such as the Gates Foundation do not coordinate their spending decisions with U.S. national goals.
3. Huge personal wealth may play a disproportionate role in political competition. Personal wealth confers an enormous advantage on a candidate, but also permits a person who does not want to be a candidate to exert an influence on candidates and policies, as in the case of Richard Mellon Scaife and George Soros. The fact that a person is a highly intelligent speculator, such as Soros, is no guarantor of political insight or wisdom; and the fact that a person has inherited a vast fortune, such as Scaife, is no guarantor of ability of any sort. More important, however, heavy campaign spending by the wealthy force nonwealthy candidates to spend increased time and effort on fund raising, which makes a political career less attractive to nonwealthy persons and makes nonwealthy politicians less well informed about policy and more dependent on interest groups than if campaign spending were lower.
Are these consequences serious enough to warrant remedial action? I think not, except that they may provide some grounds for wanting to retain, perhaps even to strengthen, the estate tax. The disincentive effects of taxing estates are much less than those of income taxation.

Comments

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Michael........ let's take a look:
Ugh.

Transfer programs (done even halfway competently) are *far* more economically efficient than raising the minimum wage that much.

........ Oh? How so? With a tax buck making the round trip from local to DC and back with a gaggle of fairly well paid 'crats taking bites out of it??

While small changes in the min wage don't seem to have a big effect on unemployment or inflation, a rise to $15/hr is likely to be disastrous for the economy.

........ I wouldn't suggest making such a change in a very short run. But??? If we short-cut the principles of capitalism and allow employers to use a man's labor at but a third the cost of maintaining the most basic living std do you "feel" that such a policy should be extended to paying the employers other costs of production too???

The reason having a minimum wage a bit over the equilibrium unskilled wage level doesn't cause significant unemployment is because of transaction costs.

......... How, do "WE" determine the "equilibrium" wage level? When capitalism simply does not work in the case of generic labor and pricing undifferentiated commodities?? And as we can SEE even in a time of increased productivity, high corporate profits and wage increases in the top quintiles that the "equilibrium" for unskilled labor follows the min wage........ DOWN well below the "costs of production" ie. what it costs to house feed and have basic med care for the "slave?"

It's easier to suck up a 10% wage hike, than go through the capital investment and training that lets you get the same productivity out of 10% fewer employees.

....... well I HOPE not! One of the GREAT spurs to increased productivity has been that of employers creatively trying to avoid the costs of labor. For example w/o computers and were we to clear checks the way we did it in 1970 it would take ALL the working women in America to do the job.

But the money has to come from somewhere. Profits get cut for a bit, and then at some point, the money starts coming from customers (which may cause inflation), and at some further point it goes toward capital investments that let companies lay off unskilled workers.

......... Oh-oh....... I'm suspecting you may be a fully trained "winger". And here's a fairly good test: The lowest TEN percent of earners get but 1.8% of the wage pie while the top 20% get 60%. One clear sign of winger status is that of claiming any dab of wage increase at the 1.8% level would be highly inflationary, break the corp and yadda-doom-yadda, while NO amount of the HUGE increases of the past 20 years at the top does any of these bad things? Would you perhaps fit the mold?

A small min wage increase is basicallly a tax on certain relatively well off shareholders and private business owners which gets paid to unskilled and low skilled workers. But with a big increase things start to go haywire and your egalitarian dreams are all undone. The more you try to raise the min wage over that equilibrium level, the more likely and more pronounced the bad side effects.

hmmmmm and in the same era as the min wage has lost 40% of purchasing power CEO compensation has SOARED by 300% and upper level salaries too have gained far more than inflation. No "bad side effects?"

The only way to pay everybody $15 without merely deflating the currency or driving up unemployment is to have the social capital available for any willing warm body/brain to produce $15/hour+ worth of wealth.

....... yep pretty sure I'm talking to a devout winger. One other clue is that of never opening an econ text..... does that fit? But just HOW did you "decide what the "productivity" of low paid workers is? Case: Grocery store clerks and produce managers etc. made higher real wages BEFORE Walmarts very productivity enhancing model was possible, yet their salaries are far lower, and indeed, about HALF that of competing Costco. Do we "feel" that the now very productive Walmart employee that helps generate the fattest bottom line in history "really are not very productive? after all?? and in fact are so worthless that US taxpayers have to chip in with EITC Medicaid and a host of other subsidies???

We don't have that, and legislation won't make it so.

What can make it so is a lot of innovation.

........ oh? We've HAD tremendous innovation and productivity has been plugging along at 3% or so which SHOULD bring a doubling of the living std every 25 years. But! the fed min of $1.50 25 years ago would buy breakfast, Today? will $5.15 buy even the same?

If you look at what was considered a living wage in 1950, and compare a life then on that to a life now at the dem proposed min wage of $7.25/hour (a rate that most economists think would provide very little distortion in most areas of the US), they're pretty comparable.

...... "comparable" eh? Probably not, but with a doubling of productivity surely those at the bottom should be able to buy TWO breakfasts for their min wage. Unless you "feel" ALL of the productivity gains SHOULD go to the CEO? who's pay went from that of 80 employees in 1980 to over 500 employees today...... and a few at the top?? Seems to me if you ARE a faith based? believer in Voodoo "trickle down" that SOMETHING other that DEBT should trickle. eh?

Some things would be worse for our modern minwage earner (housing), some things would be similar (food) and some things would be much better (tech and entertainment). Overall, I'd tend to side on the modern side if anything, but it's a pretty close decision. So we've gotten to the point where almost everybody can have a lifestyle equivalent to what we would have considered a living wage in 1950.

......... covered above.

But now, that doesn't look like a living wage. Why? because the bulk of people live better than that now. But you see that this problem never goes away. If we double wealth across the board, those currently commanding $7.50.hr will be making $15 an hour, but the people around the median would be living like the top 10% do today, and all the $15/hour people will start thinking of $30/hr as a "living wage".

........ yep. No econ text. Right? Today AVERAGE per capita income is $45,000 ie a 4 person household (two kids) would, on average, have $180,000. (Disclaimer: I'm not an advocate of all making the average) But the MEDIAN HOUSEHOLD income is but $45,000. Now in much of the country a fairly decent, but basic lifestyle could be afforded at $45K. But! remember that median means half are below that amount and I would put forth that below that figure something basic is going to be shorted. Perhaps medicare? And on down to where 38 MILLION live below the poverty line of $10,000 a LOT is going to be sacrificed.

HAD upper and lower simply participated in the productivity gains of the last 25 years while the average wage would be the same, the median would move upwards and FAR fewer would be earning a living wage, including those at min wage. But perhaps, as a winger??? you've been trained to favor helping those several rungs above to increase there share at the expense of those below?

There's no limit to it. Unless we're willing to demand a completely egalitarian society, there will always be people who live less well than the median who feel like they are poor.

......... hey, don't look now but the class warfare took place since 1980 and the lower class took a nasty drubbing. If you did read a bit on econ trends you'd hardly be worrying about "completely egalitarian" as the wage gap widens dramatically EVERY year.

And we know what happens when we try to demand a completely egalitarian society. I'm egalitarian enough to believe it criminal for a wealthy society not to make some provision for the unable or unskilled to at least have basic health and safety (shelter, food etc.),

......... ah yes. You state what ALL, decent, Americans believe: For example there are FEW of us who'd actually let someone die on the street sans medical care, but then? propose a FAR more efficient universal med care system, or that the Min Wage BE quite a major fraction of a living wage and the tap dancing and hem-hawing begins. With....... of course LOTS of help from insurance co hors.

but trying to eliminate relative wealth disparity completely or even mostly looks like a wild goose chase with no end.

........ I'm a believer in using the powerful aspects of capitalism and scarce skills and talents should be rewarded. Here's where it works: when the employees comes in a says "Well we sat down and hammered out a wage package" you're in the zone where it works. When you hear "What are "they" paying?" you're in the region where it does not work and that is why ALL modern economies have a min wage and typically one much higher than that of the US. And.... at the top it does NOT work because the old Yale pals are too close to the honey pot (note 300% CEO pay increases) and that is a major reason why a steeply progressive income tax is justified and necessary.

I've lived on the equivalent of a modern $9-10/hour (more than min wage but much less than your proposed "living wage". It's not fun, and I didn't have much insurance against catastrophe,

....... according to a recent OK study $17 is what it cost to provide those things and I'd guess your experience would confirm? Indeed, and an illness or a motorcycle/skiing accident and you'd have been subsidized by others. Does such a subsidy strike you as being a principle of honest capitalism? Did your employer also skip paying insurance on the vehicles he used? Probably not as there is no means of passing that subsidy on to others.

and I certainly prefer what I make now, but I didn't seriously worry about whether I'd have a place to sleep, food to eat or water to drink. I couldn't afford anything that americans would consider luxuries, although much of what I could afford *would* be considered luxuries by half the people on the planet.

........ well not to get you to think too much, but what do you suppose you contributed to a healthy economy when you have no money to demand and pay for the goods that are in surplus today? And were a whole town filled with ten buck folk, who would pay for schools? parks? polices? bombs? or even your own med care? retirement? disability?

I had a stereo, a guitar, a car, and a shelf full of interesting books, and once or twice a year I could afford to take a bus to NYC and go to a show or a nice restaurant or maybe take a trip to see relatives or friends across the country. I was able to eat meat and fresh vegetables and take a shower every day. How many people in East Africa live like that? 5%? 1%?

........ ummm you lived like that in the richest nation in the world (well almost) where AVERAGE per capita income is $45,000. It's a shame what colonialists have done to Africa, including enslaving its people but that's a discussion for another day.

What standard of living are we as a society obligated to provide to those who cannot earn enough? It would take a lot of chutzpah for me to demand more than the proposed new minimum wage of $7.25/hr if I couldn't demonstrate enough skill to command a higher wage without a law. Nobody says I have to live in the generally high-income,high-cost northeast (where btw, there are almost no jobs below $8/hr now anyway), or not have a roomate, etc.

........ I can only end with pointing out that if the employer does not pay enough for a man's labor to cover a basic life....... who do you think SHOULD subsidize the gap? And if he doesn't "like" to pay the full cost of his delivery truck shall we leave him to pay it or find a substitute? or pass the hat among taxpayers for him?

one of the principal reasons for growing income and wealth inequality in the u.s. is feminism. dual income households dr. dr., lawyer/ lawyer, banker/banker are now common. previously, the doctor married the nurse who quit to raise the kids, etc. now two bankers marry and hire a nanny or two. the magnitude of the effect is hard to calculate, but about 15% inequality can be explained this way

Redmund Sum made three claims, one of which seems obviously wrong, and another of which seems out of place.

The two claims are: (a) that "philanthropic acts, even massive philanthropic acts [should not] be constrained to be in concert with national goals" and (b) that "Through political contributions, those who are more successful, who are usually greater contributors to the society, should have greater influence on who should make our laws and lead our nation."

(a) is wrong because certain philanthropic acts can be incompatible with national security -- can, in other words, increase the likelihood that US citizens die or have their rights infringed. To take an extreme example, clearly donations to terrorist groups should be prohibited. Other, more moderate examples, raise "gray area" questions (should a US citizen be permitted to donate money to a foreign regime hostile to the United States, even if that money is slated to aid the citizens living under, not the armed forces of, that regime?). However, only the most radical libertarian would seriously contend that people should be allowed to give financial aid to organizations whose stated purpose is the slaughter of American citizens -- (a) expresses an unsound political principle.

(b) is a more contentious, normative proposition. It is also not incompatible with Posner's concern about the influence wealthy persons have on political candidates. Posner's claim is empirical: along the lines of "sometimes very wealthy people can influence politicians to act in unwise ways, and the more wealthy people are about (and the more wealth they have), the more likely it is that more politicians will act imprudently." Now, if you believe that wealthy people (net) do not influence politicians to act imprudently -- or, perhaps, that politicians will act as imprudently as they always do irrespective of how many wealthy persons are political activists -- then you have a legitimate disagreement with Posner. The normative claim that "those who are more successful should have greater influence on who should make our laws and lead our nation," however, entails neither Posner's claim nor the denial of Posner's claim.

Admittedly, you do suggest that Posner is wrong -- that wealthy people tend to influence politicians to behave prudently as opposed to imprudently -- but you give no explanation of why this is so (no refutation, in other words, of Posner's claim that there is no relation between financial success and political savvy). (b) is out of place.

Judge Posner is absolutely right when he says that someone being rich does not harm the poor at all; on the contrary, when someone enriches they are greatly helping the poor.

However, it is not, as is commonly thought, by spending the rich man makes of his money that helps society. Were this money distributed differently, it would have been spent on other things, and the net effect to the economy would be zero.

In reality, the wealth of the rich is the consequence of their having helped society. A man¬¥s income is what he is able to offer others.
If a man has got rich on the market, as Bill Gates has, it means that he has been able to satisfy the needs and desires of people in the way the people themselves judged the best.
He managed to use available resources in such a way that they were more efficient in improving people's lives.
Were this not the case, no-one would have bought his products, and he would not have got rich.

Great income, in the free market, means great serving of society's needs (from society's own point of view).
The only condemnable wealth, then, is that which is got from governmental repression and coercion, as for example when the government impairs competiton in a given market sector and thus helps the formation of big corporations.

There is nothing wrong with income inequality when it is the product of the free market. The problem which needs adressing is that of unmerited wealth (acquired with fraud, coercion, governmental aid, etc).

Joel: I'm guessing of course but you seem to fit into that category who A. has never opened an econ text B. are driven by partisan "pop" "conservative" rhetoric. So let's apply a few economic principles to your claims:

Judge Posner is absolutely right when he says that someone being rich does not harm the poor at all; on the contrary, when someone enriches they are greatly helping the poor.

....... hmmm "being rich" presupposes getting rich and your claim would largely be true for Edison, Ford and Jonas Salk. In the case of Walmart it would fit as well for their having "invented" a very productive distribution system.

....It would not fit for Walmart using massive economic power to bid supplier prices down below their costs so that they too have to take bread out of the mouths of their employees in order to "compete".

...... And, it would not fit for Walmart purposely driving their own wages down to the point that taxpayers pick up some $1.5 billion of what should be THEIR wage costs. This act simply enriches Walmart and the Walton heirs at the expense of their near poverty level employees, as well as a forcible taking from taxpayers who put those benefits to the poor in place FOR those having genuine, and hopefully, temporary hard times, and NOT to further enrich the richest company in world history.

However, it is not, as is commonly thought, by spending the rich man makes of his money that helps society. Were this money distributed differently, it would have been spent on other things, and the net effect to the economy would be zero.

......... well, No. Even though some rich try pretty hard to make me wrong, no matter how rich they are they can only drink so much wine, use so many computers, Ipods, CD's etc. Meanwhile at the bottom many are yet to buy their first computer or many other consumer item beyond the barest basics. Now THE main problem of ours (and that of much of the world) is a shortfall of Demand, ie our US economy is running at an estimated 70% of capacity, and in a snapshot could be pictured as being stagnant by "those who have the wallet having bought already, and those who'd like to purchase not having the wallet to buy."

In reality, the wealth of the rich is the consequence of their having helped society. A man¬¥s income is what he is able to offer others.
If a man has got rich on the market, as Bill Gates has, it means that he has been able to satisfy the needs and desires of people in the way the people themselves judged the best.

......... well, "kinda;" the graduating group most likely to make a million before they turn thirty are those headed for "investment banking" or moving tons of money around to accomplish a consolidation of corporations that MAY provide benefit, but most likely simply limit competition and do nothing for the "poor" or cause price increases. Gates has pushed his monopoly power to the very edge, if not beyond our laws against such activities and I could certainly argue that we're stuck thinking his products are the "best" or represent "good value" w/o the benefit of vigorous competition.

He managed to use available resources in such a way that they were more efficient in improving people's lives.
Were this not the case, no-one would have bought his products, and he would not have got rich.

........ what else would you buy?

Great income, in the free market, means great serving of society's needs (from society's own point of view).

....... probably not true. "The Market" ie capitalism itself is NOT a flawlessly perfect engine. That's why EVERY nation has unemployment, a minimum wage law, farm price supports, a progressive income tax and some amount of a "safety net" along with a host of laws about collusion and anti-trust.

The only condemnable wealth, then, is that which is got from governmental repression and coercion, as for example when the government impairs competiton in a given market sector and thus helps the formation of big corporations.

....... well the thread is about inequality and you'll not have to look very far to see how inequality is dramatically enhanced by "rent-seekers" buying econ favors from Congress. Is the number of K-Street lobbyists "earning" upwards of $500/hour about 150,000 today? And have you seen picture of that cute little building in the Caymans where 12,000 of "our" corporations maintain their tax haven HQ's?

There is nothing wrong with income inequality when it is the product of the free market. The problem which needs adressing is that of unmerited wealth (acquired with fraud, coercion, governmental aid, etc).

........ Semi-true but those who have a "faith-based" belief in the perfection of "The Market" comprise the ripest of suckers for enriching those above themselves at the price of having tighten their own belts. Econ is not a religion but a tool of a democratic society. Jack

True story. But that's only because we all think the "market" should be accomplishing something, and when it fails to do so, it's "not perfect." But I think it's a little much to expect property rights and freedom of exchange to result in a utopia where everyone is as well off as they want to. The market accomplishes that which can be expected of it, which is that it gives everyone an equal opportunity. [Don't start. Not the market we have. The pure market from the econ textbooks does. And there's no violence there, either.] This doesn't result in outcomes we want mostly because we care about how other people are doing. We don't want people to be desperately poor, so we construct social safety nets. This is not a failure of the market - it's a feature. The slow get eaten. But we care about the slow and we take care of them, and it's only right that we do; it's our moral sense more than anything that makes us human. It's only natural that we want everyone to be a little more "equal" than they would be if things were all left to their own devices, and it's only good that we want that. But we also have to take responsibility for this desire, meaning that if we [as in, society, the electorate, whoever is making this decision] want redistribution of wealth in the name of equality, we better be ready to pay for it. Not by making other private parties do so with a massive minimum wage, but with our own tax money. Less wealth disparity isn't a bad thing, but pawning the costs off to others is simply unfair.

On a related note, when did the cost of production of something become a measure of its value? Value is and always has been subjective - that's why trade isn't a zero-sum game. Jack, you allege that one needs a $17/hr wage to survive. I won't even dispute that, even though I'm getting by on a lot less than that, and I know many who are. What I don't understand is why someone should be compelled to pay that price to labor that doesn't produce that much value in an hour. You say the reason for the low wages for generic labor is the overabundance of generic labor. [As taught by every econ text.] To be blunt, if people are earning so much less than they need to live, why don't they die? Wouldn't that massively lower the number of generic laborers to the point where the wages would rise as a result of the scarcity of generic labor? The fact is that even at minimum wage, Americans are leading some of the best lives in the world. If we want people to make more money [to curb inequality], the key is to improve education and make the labor more valuable, not to compel high compensation of low-value labor. That's what's happening around the world: the Indians and the Chinese are learning technological skills that allow them to "steal" American manufacturing jobs. [Not that I for a second agree with the proposition that Americans are in any sense more entitled to these jobs than the rest of the world.] Of course this drives down wages in manufacturing in the US, but it helps the poor countries converge towards the rich. There is less worldwide inequality in areas in which free trade reigns, and free trade will continue to drive down inequality in every industry in which it is permitted. If any inequality remains, well... some people just work harder. They should do better than someone who is up at 5 AM posting on a blog.

Great rewards for entrepreneurs are fine. But what about wall street i-bankers earning $160k right out of undergrad? Or CEOs earning tens of millions of dollars in salary and perks, often while their companies perform badly, or leave on incredibly rich golden parachutes?

Aren't these examples of broken market mechanisms?

Don't they create the appearance and substance of unfairness? Do you really think the Ibanker is adding $160,000 in value -- or is his salary the result of some kind of bizarre supply problem? Why do you think doctors and laywers are fleeing to Wall Street -- because they're really doing more good there?

Even if the CEO does a reasonably good job, is it really true he wouldn't do it for a much smaller salary, given the enormous prestige and power associated with being a CEO?

Jack, from your reply it became clear to me that you have been reading too many economic textbooks, and have accepted uncritically the confused notions they often present.

First of all you seem to think that demand promotes economic growth. If only the people could buy more, society as a whole would be richer.
This is one of the most dangerous economic fallacies, and once our mind has accepted it it is very hard to free ourselves from its illogical consequences.

Another grave error becomes apparent when you say that the owners of Wal-Mart earn their profit "at the expense of" the workers.

But this analysis disregards the fact that every voluntary transaction is mutually beneficial.
An employer and a worker who have agreed voluntarily to the terms of their contract are always benefited by it. Both sides are getting more than they gave from their own estimation (or else they would not enter the transaction).

Low wages are NOT the outcome of political will or of greedy entrepeneurs. It is the result of the low value of the labour in question.

The high income of the entrepeneur, in the free market, is the result of the very high value of his function.

To distort this artificially by means of coercive action (that is, government action) would only skew the precious information and signals given by market prices, profits and losses (information which cannot be got from any other source).
Furthermore, this change in distribution, even if we disregarded the harm done to incentives and to information, would not promote economic growth.
It is a logical impossibiliy to say that an economy performing poorly due to lack of demand. What keeps societies from being richer than they are is their incapacity to produce more than they do, that is, limitations in supply.

About executives and corporations who get favours from the government, you and I are in complete agreement: this is completely illegitimate on all cases.

Did you know that Wal-Mart recently defended the rise of the minimum wage? This was not done out of charity on the owners' part. Higher minimum wages leave Wal-Mart on a better situation by making life harder for its smaller competitors.

Finally, I assure you that the idea of a "perfect" market, of "perfect competition" and similar abstract concepts are not what I base myself on.
On the contrary, the fact that information is incomplete, imperfect, that valuations cannot be calculated and that the future is uncertain only strenghten the case for the free market rather than justify governmental intervention.

This string started with a comment that "indications that inequality is surging at the very top of the income distribution merits a further look." I gave it a closer look in my textbook "Income and Wealth" and also in today's Wall Street Journal(December 14). The data, culled from a sample of individual income tax returns, are deeply flawed and not confirmed by any alternative series, such as those from the Census Bureau or Survey of Consumer Finances.

Plato and Aristotle agreed that Democracy where everyone could vote would be unsustainable because the lower class is greed, wicked, jealous and would eventually unlawfully seize the possessions of the upper class. It's happening now with estate tax and will get worse.

Plato and Aristotle agreed that Democracy where everyone could vote would be unsustainable because the lower class is greed, wicked, jealous and would eventually unlawfully seize the possessions of the upper class. It's happening now with estate tax and will get worse.

Jack, from your reply it became clear to me that you have been reading too many economic textbooks, and have accepted uncritically the confused notions they often present.

........ Deepest apologies for basing my economic views on the principles of econ contained in econ texts, I'll see if I can trade them for .... a bible? or at leasts some of Limbaugh's juicier tidbits at my first opp.

First of all you seem to think that demand promotes economic growth. If only the people could buy more, society as a whole would be richer.
This is one of the most dangerous economic fallacies, and once our mind has accepted it it is very hard to free ourselves from its illogical consequences.

........ Oh? Tell you what you build your cafe on the old road of little demand and I'll take the new road. (I could still screw up though if only one in 100 cars has the price of a burger and the other 99 did not.) You really ought open an econ text sometime, those little supply and DEMAND graphs can be really cute.

Another grave error becomes apparent when you say that the owners of Wal-Mart earn their profit "at the expense of" the workers.

But this analysis disregards the fact that every voluntary transaction is mutually beneficial.
An employer and a worker who have agreed voluntarily to the terms of their contract are always benefited by it. Both sides are getting more than they gave from their own estimation (or else they would not enter the transaction).

.......... or so it's taught in right wing Sunday school. I think, even you, might like reading about generic labor and undifferentiated commodities having little price setting power and the effect of few buyers and many sellers bidding the price down yes...... "below the cost of production". As if THAT flaw was not bad enough by itself we've those pesky Fed Reserve bankers screwing down the money supply EVERY time the "official" unemployment rate drops much below 5%. Ahhh, yes indeedy those unemployed "welfare sucks" are in fact brave frontline soldiers in the "war" against inflation.

........ As for those employing EITHER a delivery truck or an employee NOT paying the costs of operation in a capitalist economy which SHOULD and must direct scarce resources to the efficient operator who'll make the highest and best use of them, WHO do you suppose should subsidize that portion of the costs of operation the employer does not "wish" to pay? Currently in the case of the min wage or "Walmart" worker it is the taxpayer and those who pay higher medical insurance premiums for those who can not pay anything. Are you something of a socialist? Expand the EITC and tap the taxpayer even more???

Justice: I'll certainly keep that in mind but am a bit troubled by the poor allowing the min wage to lose 40% of its purchasing power while CEO pay soared by 300%.

Could it be their having lived so many centuries before capitalism was invented? And Karl Marx? who's rep as an economist was a bit sullied by proposing communism, but appears to be spot on for predicting that capital would bid labor down to the point that revolution (or.... unions, FDR, min wage and work rules) were the only hope for destitute workers.

BTW despite the bleatings of the "death tax" set, the Estate Inheritance Tax was proposed by Republican/Bull Moose Teddy Roosevelt:

"The man of great wealth owes a peculiar obligation to the State because he derives special advantages from the mere existence of government." As Roosevelt further argued in a June 1907 speech: "Most great civilized countries have an income tax and an inheritance tax. In my judgment both should be part of our system of federal taxation." Such taxation, he noted, should "be aimed merely at the inheritance or transmission in their entirety of those fortunes swollen beyond all healthy limits."

and.... "The estate tax, adopted in 1916, was one of the means by which Americans rejected the Old World, with its political and economic monarchies."

........ here is what Bill Gates Sr has to say about it:

http://www.prospect.org/print/V13/11/gates-w.html

Plato and Aristotle agreed that Democracy where everyone could vote would be unsustainable because the lower class is greed, wicked, jealous and would eventually unlawfully seize the possessions of the upper class. It's happening now with estate tax and will get worse.

We don't want people to be desperately poor, so we construct social safety nets.

...... yes! Our humanity and care for all the members of the village or tribe come before blind faith in some abstract economic engine. Indeed, we want to USE the best of capitalist principles as a tool, not BE a tool of capitalism run amok as it did in the last "gilded age".

Not by making other private parties do so with a massive minimum wage, but with our own tax money.

........ a living wage is hardly "massive". And what would you think of a capitalist slave owner who expected his neighbors to pitch in for the housing and health care of his slaves? Or, today, one fellow may make a mint delivery Ipods in a delivery van, while for the grocery it might be only a loss leader..... as a capitalist, I expect BOTH to pay the full costs of owning and operating their vehicles and the same for their employees.

What I don't understand is why someone should be compelled to pay that price to labor that doesn't produce that much value in an hour.

......... he shouldn't. If the value of what is produced is ascertained to be less than a living wage for the employee the employer should figure out whether he can do it A. himself? B. using a machine C. not at all. BTW how did you discern that .... say, the delivery driver didn't produce "that much value in an hour?"

On a related note, when did the cost of production of something become a measure of its value?

........ it hasn't. But! if its value is below the cost of production, you can decide not to provide it, but it would be dishonest of you to expect to get a subsidy from the taxpayer in order to produce it.

Value is and always has been subjective - that's why trade isn't a zero-sum game. Jack, you allege that one needs a $17/hr wage to survive. I won't even dispute that, even though I'm getting by on a lot less than that, and I know many who are.

....... the "alleging" came from an OK study.... one of the lower cost areas in the US. Would I be making a bad bet to bet that you and the others are NOT truly "getting by on a lot less?" but counting on a variety of subsidies? EITC? Or counting on others to cover your medical costs? And..... once again I arrive at the point to ask any capitalist here, "If your employer does not pay you a living wage that covers the most basic std of living WHO should pay the remainder? And.... what sort of economic distortions does that inject into the market?

How 'rich' are we going to get if employers hire 20 men with shovels, pays his $5, leaves the taxpayer holding the bag for $10 or so, instead of paying one man with a ditch digging machine $100? Note the biz guy pays the same in both cases but does not "third party" $200/hour.

The best way to increase the wealth of the poor is to elliminate Intellectual Monopoly Protection -- get rid of copyrights and patents, which are enforced by gov't action.
The retail cost of a CD with music (or software) should be less than twice the cost of a blank CD.

Digital sharing should be legal.
Less innovation may be one result, but it's not certain to be less -- more research will be done to become famous, and to most quickly spread good ideas.

On taxes, land ownership should be taxed more (a zero-sum issue; I'd suggest $100 000 deductable with 1%/year on all property value above that); and pollution creation (like using gas).

The key for reducing absolute poverty is home ownership -- all workers should be able to buy a home.

There should be another type of company: an Employment Maximizing Company, which constantly increases the number of employees "instead" of making a profit -- but otherwise runs like profit making company. With a bottom line of headcount, upon which its managers get higher quantities of cash.

The second consequence you note is particularly important. Warren Buffett‚Äôs decision to donate part of his fortune to nonproliferation efforts is not philanthropic but rather a political in nature. The money will likely be directed and preventing certain states from obtaining nuclear weapons instead of striving to reduce the nuclear stockpiles of the current nuclear powers.

The best way to increase the wealth of the poor is to elliminate Intellectual Monopoly Protection -- get rid of copyrights and patents, which are enforced by gov't action.

...... but you'd get far less effort. I worked in software before code was protected and while it's true a lot of stuff circulated around in a Linux like manner for free But who would pay a staff of programmers to create games or other software of millions of lines of code?

........ I go part way with you though, with perhaps a shorter protection, or perhaps consider that when a program is not longer supported (as is happening to Win98) or that it's no longer distributed that it become public domain. But then Gates would offer token support for 98 for the next ten years!

The retail cost of a CD with music (or software) should be less than twice the cost of a blank CD.

....... probably wrong. Currently a top artist gets something in the $2 range and the less powerful he is the more promo expense he has to chip in out of that. Though we all "hate" the producer/distributor they DO have costs. While such as Walmart could cherry pick the top 40 and sell for 20% of retail, just try to run a specialty store for less than 40%.

...... but you've a good complaint, currently CD's are in essence price-fixed as the distributor participates in local advertising ONLY if the price is maintained at or above what you see. It seems to me that a lot of their problems would be a lot smaller if CD's were $10 as for making a few copies I think that talks me into buying more, as I figure a copy for a few friends is much like the olden day tradition of taking your records over for others to hear.

Digital sharing should be legal.

....... file sharing would appear to wreck the game, I had a lot of fun while Napster was around looking up oldies and rare jazz stuff much of it most likely out of print or hard to find and the artists mostly long gone. But how would new artists, recording studios et al be compensated?

Less innovation may be one result, but it's not certain to be less -- more research will be done to become famous, and to most quickly spread good ideas.

...... I like to share thoughts and ideas too, as on this blog, but its not what keeps the wolves from the door.

On taxes, land ownership should be taxed more (a zero-sum issue; I'd suggest $100 000 deductable with 1%/year on all property value above that); and pollution creation (like using gas).

....... I'm way with you on shifting a goodly chunk of our income tax onto non-renewable resources and would consider scaling that tax to penalize the dirtier fuels. But! that may well mean tossing a great and flexible fuel like NG into what used to be a huge coal-fired generation plant and runnning out of it sooner. Some tough choices and a lot more research? "Clean coal tech?"

The key for reducing absolute poverty is home ownership -- all workers should be able to buy a home.

......... this one has seemed "a sure thing" from the 70's on, but hasn't always been the case. Much of the "wealth" from homeownership has been due to the decline of the value of the dollar with the "baby boomer" expansion of demand heaped on top combined with a tax policy that makes it a virtually free means of collecting a capital gain. In the 50's home prices didn't change much and renting was a viable option. We "may" see another era like that as, now wealthy middle age boomers hang onto the family home, perhaps have a second home (in part to duck taxes on deductible interest and convert income into a free capital gain) but if as they "downsize" and give up many of these holdings housing may not be in short supply and prices could be flat for a long time.

There should be another type of company: an Employment Maximizing Company, which constantly increases the number of employees "instead" of making a profit -- but otherwise runs like profit making company. With a bottom line of headcount, upon which its managers get higher quantities of cash.

........... Interesting. Other advanced countries try to manage "full employment" But not easy to accomplish. Currently I'd say "our" nationless corpies use their K-street lobbyists to ENSURE there will be a surplus of labor and that, as we've seen the lower 40% of earners have not had the clout to get a raise in a dozen years. (See you at the voting booth!) Jack

A lot of you pretty much beg the question by asserting that Bill Gates "earned" or otherwise deserves "his" money.

How does one person "earn" $40,000,000,000. Walking on water? Being 100,000 times smarter than you? No one person can be so much better or more adept or whatever to "earn" or "deserve" or "merit" $40 Billion.

What has effectively happened is dollar votes have been aggregated to elect Bill Gates president of the "free" market. Not because he earned it but because someone has to do it.

Lots of drinkers of the free market kool-aid this week. People who are afraid of the estate tax are funny. You know you need to pull the silver spoon out when democracy starts to scare you. What's it like to have something that 1) the masses don't think you deserve, and 2) only facism can protect.

Your blog makes some excellent points however you forget to mention that the top 1-2% usually live in the places with the highest cost of living (i.e. New York, San Francisco, Los Angeles). A couple who makes over $300,000 in New York can't even necessarily afford a two or three bedroom apartment. Furthermore, many of those in the lower 1% have astronomical debt from law, medical, and business school. Those who judge the income distribution in this country without factoring in cost of living, debt, and total wealth do so at their peril.

Furthermore, has anyone mentioned that most of those who speak of the income inequality in this country are typically very wealthy or at least upper-middle class? It seems in some cases that the mention of income inequality is done by those who feel guilty about their wealth or how they made their wealth (i.e. people like Soros who makes money when other people lose on currency speculation).

Income inequality is a real problem. However, much like global warming I would be more sympathetic to those advocate for doing something, if they altered their personal life first. Guys like Soros or Buffet should be paying their fair share of taxes and doing more personally to help the poor. In the case of Soros he helps the poor in other countries (but not in this one) but spends a lot more of his time striving to influence global markets and global debates. Buffet, notoriously pays almost little in taxes and his pet cause (controlling population growth) does little for the poor in this country.

What has effectively happened is dollar votes have been aggregated to elect Bill Gates president of the "free" market. Not because he earned it but because someone has to do it.

Lots of drinkers of the free market kool-aid this week. People who are afraid of the estate tax are funny. You know you need to pull the silver spoon out when democracy starts to scare you. What's it like to have something that 1) the masses don't think you deserve, and 2) only facism can protect.
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Your blog makes some excellent points however you forget to mention that the top 1-2% usually live in the places with the highest cost of living (i.e. New York, San Francisco, Los Angeles). A couple who makes over $300,000 in New York can't even necessarily afford a two or three bedroom apartment.

@@@@@@@@@@@@ Well it takes a million bucks to make top 1%

Here's a link that could put it in perspective:

http://www.allegromedia.com/sugi/taxes/#Head-4.htm

Sorry, it's 1999

Furthermore, many of those in the lower 1% have astronomical debt from law, medical, and business school. Those who judge the income distribution in this country without factoring in cost of living, debt, and total wealth do so at their peril.

Furthermore, has anyone mentioned that most of those who speak of the income inequality in this country are typically very wealthy or at least upper-middle class? It seems in some cases that the mention of income inequality is done by those who feel guilty about their wealth or how they made their wealth (i.e. people like Soros who makes money when other people lose on currency speculation).

@@@@@@@@ hmmm, How do you surmise that 'guilt' is what drives those VERY few who speak out? Have you "heard" the efforts of the Walmart heirs crying more more more and paying lobbyists millions to get rid of the estate tax?

Income inequality is a real problem. However, much like global warming I would be more sympathetic to those advocate for doing something, if they altered their personal life first.

@@@@@@@@ Agreed; it is a REAL problem that is NOT being addressed by "The Market". Not sure what you think the super rich should do volunatarily but I think we've had a glimpse of what many do, do.

Guys like Soros or Buffet should be paying their fair share of taxes and doing more personally to help the poor.

@@@@@@@@ Funny thing is that Buffet who WAS going to be an "Arnie" advisor told Californians that he was cutting a VERY fat hog at their expense due to the Reagan Jarvis Prop 13 being SUCH a benefit to the rich and a scam for those with much less. Arnie didn't bring him around after that.

In the case of Soros he helps the poor in other countries (but not in this one) but spends a lot more of his time striving to influence global markets and global debates.

@@@@@@@@@@@@@@ It's his choice isn't it? And he was not born here and made his first Billion shorting the Brit Pound (when it was in about the same position as is the US buck today)

Buffet, notoriously pays almost little in taxes and his pet cause (controlling population growth) does little for the poor in this country.

@@@@@@@@@@ Yup.... and brags about, and advises that one of his "secrets" is that of picking very carefully and NEVER selling (except REAL dogs for which he can deduct the losses against his steady wins) and it's a "secret" of many of the rich.

@@@@@@@@@@ You don't come out and say so, but perhaps you'd advocate public policy that would slow the rapidly widening wage/wealth gap?

All the casual comments above are unimpressive. I am a child of parents who were children of the Depression. My parents suffered hard, but managed to raise their kids OK. We, the kids, froze our butts off in Midwestern winters, living in an attic converted to a bedroom. It certainly was better than sleeping outside.

It was my privilege to supplement our family's income by delivering the St. Paul Pioneer Press in the morning, and the St. Paul Dispatch in the afternoon, for four years. Delivering a newspaper with a headline that screams "40 below zero," dragging copies along on a sled to loyal customers, was tough but manageable.

So much complaining nowadays comes from people who don't know what it is like to work really hard (meaning you feel like your back will break, and your fingernails accumulate earth beneath them, and bones break occasionally, etc.).

All this complaining about wealth inequality really leads nowhere. The complainers are either too lazy to get off their asses and work, or visualize themselves as some sort of privileged class who need not do so, and can preach to those of us who do work the hard way.